Taiwan banks face higher loan risks: updated 4:52 p.m.

Alfred Lee, The China Post

Local banks are facing higher loan risks as an increasing number of troubled enterprises are having problems paying interest on their loans.

Taiwan’s banks and financial institutions are afflicted by the tricky interest paying practices of their debt-ridden corporate customers.

One of the tricks is to postpone the payment of interest for slightly less than the six months it takes for the loan to go into default, and then pay only one-months interest – enough to prevent the creditor banks from taking legal action against the debtor. This approach also prevents the loans from becoming overdue.

While debtor companies are deferring interest payments they normally engage in negotiations with their bank creditors, in the hope of lowering interest rates and charging the due interest to a special account to be settled at some future date to prevent their loans from going default.

The creditor banks reported that Tuntex Group had renegotiated its debts twice with creditor banks. After its first negotiation with the banks, Tuntex was allowed to pay a reduced interest rate of 6 percent. Tuntex further expected to pay only 3 percent of the interest in cash, putting the remaining 3 percent on charge. In its second round of negotiation with the creditor banks, Tuntex requested that it allowed to pay only 1.5 percent of the interest in cash, with the remaining 4.5 percent put on charge.

While Tuntex’s requests are still awaiting a unanimous agreement among the creditor banks, several creditor banks have agreed to make the concessions to the Tuntex Group as requested by Tuntex.

To the disappointment of such creditor banks, which granted favorable interest payment terms to Tuntex, Chuan Ying Long, which is affiliated with its parent company Tuntex, filed for company restructuring with the local court without prior notification to its creditor banks.

Local banks have reported that many big companies are only paying a portion of their interests. The Ever Fortunate Group is paying 3 percent of its interests in cash with the remaining 3 percent charged. Hong Kuo Group, a real estate developer, and Ching Fong Group, are paying 1.5 percent of their due interest in cash with the remaining 4.5 percent charged.

Hong Shi Group, another real estate developer, takes the same interest payment action as that of Tuntex: paying only one month’s interests within a period of six months to keep its debts from nonperforming.

Although the number of companies which have defaulted on their payments, is not yet great, local banks fear that the number of companies with loans threatening to turn bad could increase substantially in the near future.